Volatility is here to stay and companies need to take risk management seriously, expert says

CFOs know there are plenty of risks to worry about in the new year. And many also now find themselves leading their organization’s risk management planning.

So when a geopolitics expert tells an audience of risk and insurance pros that many organizations do not place enough emphasis on risk management, we listen and we don’t judge.

“All too often in firms of various size, risk management…may exist, there may be people in a risk management department, but their warnings are sometimes background noise to the imperatives of the business strategy,” Michael Mazarr, senior political scientist at Rand, said recently during a webinar hosted by insurance carrier Travelers.

Mazarr may be a political scientist, but he draws upon his experience examining the lessons learned in risk management following the 2008 global financial crisis.

Things are getting messy. In this incredibly crazy world where it seems impossible to predict what’s coming next, volatility is now the name of the game, according to Mazarr. He told listeners that volatility is “now a feature, not a bug, of the international system we’re going to have.”

Mazarr said businesses must “identify a process of preparing for consistent volatility by identifying the specific avenues of vulnerability,” including supply chain disruption, inflation, interest rates, or others. After identifying the potential sources of volatility, business leaders should create mitigation plans or “hedging strategies.”

“Companies theoretically are doing this all the time, but at least from my study of the risk management processes…that sort of obsession with the risk of volatility isn’t always there,” Mazarr said.

Where’s the risk? During the webinar discussion, Mazarr led a global tour of sorts to highlight various sources of geopolitical risk. They include the ongoing war between Ukraine and Russia; conflicts in the Middle East and the rebuilding of Gaza; tensions between China and Taiwan; and also “a surprise within the next 12 months” such as another war or crisis that’s not on anyone’s radar.

He also mentioned risks involving disinformation, artificial intelligence, and cybersecurity. Mazarr said experts contemplate the possibility of one country reaching a “self-fueling feedback loop” in its AI capabilities that will give it significant military and other advantages.

“If you’re not spending some of your time every week becoming conversant with emerging [AI] models, their capabilities, [and] their limitations, then I think you should be,” Mazarr said.